Extended Data Fig. 1: Schematic supply of emission allowances and CROs at a fixed point in time.

The supply of allowances is completely inelastic (emission cap), whereas the supply elasticity of CROs is determined by discounted future abatement costs, which increase as the demand for CROs increases, as well as interest costs, which can be controlled by managing authorities and financial institutions (dashed blue CRO supply curves). If CROs are traded on a market, they clear at the same price as allowances and thereby reduce the price of allowances. The larger the elasticity of the CRO supply curve, the lower the potential for price volatility (red arrows), as—for example—induced by a demand shock (dashed orange line). The sum of allowances and CROs issued equals net emissions. Abated emissions equal the difference between baseline emissions (green) and net emissions and consist of emission reductions and/or carbon removal.